Home Buying Series: Home Buyer’s Plan (HBP)

How to use the Home Buyer's Plan to help save your down payment.
Our home buying series continues and this week we are looking at the Home Buyer’s Plan; a convenient tool that helps you use your RRSP’s for buying your first home. The last couple of weeks we’ve been talking about Renting vs. Buying and Saving Your Down Payment

With the Canadian housing market the way it is, it can feel impossible to save enough money up for a down-payment on your first home. You need to have a minimum of 5% for a down-payment to get a mortgage, and any down-payment under 20% requires insurance coverage through CMHC (Canada Mortgage and Housing Corporation) which will cost you a pretty penny. But let’s be honest, 20% can be impossible these days, so it’s not unlikely you’re just aiming for the 5%. Just a note, CMHC also changed their rules recently, and you now need 10% down for any portion of your mortgage that is over $500,000. 

One thing you are able to do to help out with your down payment is to make use of the Home Buyer’s Plan (HBP). The HBP allows first time home-buyers the chance to pull money out of your RRSP with no tax to use towards the house purchase. You can withdraw up to $25,000 within one calendar and if you’re buying with a partner the amount would double to $50,000 (assuming they are also a first time buyer). The process is pretty simple, there’s a quick form you need to complete and submit to your RRSP provider, and voila…tax free money in your pocket!

 
Ok, it’s not quite that painless, you do need to pay the money back, but you do have 15 years to do it. No putting it off, though, you’ll have to pay back 1/15th of the amount every year, starting the second year after you pulled out the funds. If you don’t make your scheduled repayments it will cost you, the amount you were due to pay that year will be counted as income and taxed at your marginal tax rate. The amount you owe in repayments each year will show up on your notice of assessment, but it will also just be the original withdrawal amount divided by 15. The repayment amounts don’t act as regular RRSP contributions, as in you don’t get a tax refund on that amount…you got that the first time around. 
 
The big advantage of saving for your down-payment within your RRSP is that you’ll get money back from your contributions when you file your taxes and that can be an extra bonus in your saving. The HBP may also give you access to funds contributed via a work plan. If your employer contributes funds to a Group RRSP you and doesn’t have withdrawal restrictions you may be able to pull those funds out as well. 
 
A couple of things to take note of before you plunge ahead. Those RRSP funds are supposed to be for your retirement, so promise me now that you’ll ramp up your retirement savings once this house purchase has settled down? It’s important to remember that if you left that money in your RRSP, it would sit there and earn you some interest and/or growth that you’ll miss out on. You also want to make sure that you don’t invest in anything too risky while you’re building up your down-payment. The last thing you want is to be stuck in a down market (like now) when you need to pull out money. 
 
Another thing for first-time buyer’s to remember is that you can claim up to $5,000 when filing your taxes for the home buyer’s amount. The full amount can be claimed by you or your spouse (if applicable), or it can be split. Every little bit helps, that first year owning your own home can be pricey. 
 
Feel free to post questions or comments below, and you can also check the CRA website for more information. Next week we’ll be continuing the home buying series and will be focusing on getting your mortgage pre-approval. 

Check out the other posts in this series: 

1. Home Buying Series – Renting vs. Buying
2. Home Buying Series – Saving Your Down Payment
3. Home Buying Series – Home Buyer’s Plan (HBP)
4. Home Buying Series – Mortgage Pre-Approval
5. Home Buying Series – House Hunting
6. Home Buying Series – Closing Costs

How to use the Home Buyer's Plan to help save your down payment.

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